Texas Mechanic's Lien and Bond Claim Law
A. What Is It?
The Texas Property Code section which governs the subject defines a "mechanic's lien" as "the lien provided by [the Texas Property Code]." Texas Property Code §53.001. This is of little help. Black's Law Dictionary is better. It defines "lien" as a charge or encumbrance upon some property. Webster's is better still, and it defines "lien" as "a charge upon real property for the satisfaction of a debt," and it compares a lien to a mortgage. However, a lien really is not a mortgage, because it is not voluntarily created by the signing of a security document in exchange for the loan of money. So, for our purposes in this seminar, we will define a "mechanic's lien" as a "charge or encumbrance against the title to real property (land and improvements) created by law to secure persons who have either labored, or who have provided labor, materials, machinery, fixtures, or tools to erect or repair (or remodel) improvements to land." The term "mechanic's lien," therefore, is also often referred to as a "mechanic's and materialman's lien,"or, at times, as a "construction lien." The terms are synonymous.
Mechanic's liens are favored under the law because the labor or materials or equipment which have been used on the construction project actually become a part of the land itself and give the land greater value than it had before it was improved, and it would be unfair and unjust if the person who improved the land in such a manner were not paid. In order to secure the contractor's or supplier's payment, therefore, the law entitles the person to claim a lien against the land and the improvements until the debt is either paid or, in some instances, the lien is replaced by another type of security known as a bond. Bonds are covered elsewhere in this seminar.
In Texas, mechanic's liens are created both by statute (The Property Code) and by the Texas Constitution. A statutory mechanic's lien exists in favor of those persons who are qualified to have one (covered below), and they must be properly and timely "perfected" in order to have legal effect as an encumbrance against the owner's title. The "perfection" process, which involves both written notice and public recording, is exact and must be strictly followed. It, too, is discussed elsewhere. The constitutional lien, however, is self-executing and does not require either the notice or public recording procedures of the statutory lien. As you will see, however, it is somewhat more restricted than its statutory cousin.
B. Work Subject to the Lien.
The labor and/or material covered by a mechanic's lien is well defined by law and by the long history of court decisions which have interpreted the Texas Constitution and lien statutes. Under the Constitution, a person who is entitled to a lien is granted one in an amount equal to the value of the labor done and/or the value of the material furnished. The term "material," furthermore, is intended to have the broadest definition possible. Nevertheless, the term does not encompass a few types of services such as meals provided, lodging, and miscellaneous expenses.
A statutory mechanic's lien secures the payment for (a.) the labor done or material furnished for the construction or repair of improvements, (b.) any material specially fabricated for the project, even if that material was never delivered or incorporated into the construction project, less the fair salvage value of the material; and (c.) the preparation of plans or a plat by an architect, engineer, or surveyor, provided such was done under a written contract with the owner. Texas Property Code §53.021 and §53.023.
Attorney's fees may be recovered in an action to enforce a mechanic's lien, even though they may not be added into the amount of the debt covered by the lien. Texas Property Code §53.156.
C. Who is Entitled to a Claim of Lien?
A very important distinction exists between the constitutional lien and the statutory lien insofar as identifying the persons who are entitled to lien protection is concerned. In order to claim the protection afforded by a constitutional lien, the person must have provided labor or material under a contract directly between the contractor and the owner, or the owner's agent. Under the Texas Constitution, therefore, subcontractors and suppliers who contract with the prime contractor or another subcontractor are not entitled to a constitutional lien.
The benefits of a statutory lien extend to a broader class of persons. Under the Texas Property Code, a person is entitled to a lien if the person (a.) labors, specially fabricates material, or furnishes labor or material for construction or repair of a house, building or other improvement, a railroad, or a levee or embankment erected for the reclamation of overflow land along a river or creek, and (b.) if the person does so under or by virtue of a contract with the owner or owner's agent or with the contractor or another subcontractor. Texas Property Code §53.021(a). Such persons who claim their lien rights under the contractor or another subcontractor are often referred to as "derivative claimants." See, e.g., Texas Property Code §§53.056, 53.057, and 53.058.
Under both the Texas Constitution and Property Code, there may be more than one prime contractor. Additionally, the word "person" includes not only an individual, but also a corporation, partnership, estate, the government or a governmental agency or subdivision, a trust, or any other legal association or entity. The contract which might result in a lien may be either written or oral, unless it pertains to a homestead.
D. Residential Construction Liens: Subchapter K.
Subchapter K of Chapter 53 of the Texas Property Code (Sections 53.251 through 53.260) is a newly added Subchapter which deals exclusively with residential construction projects. It incorporates the provisions of former Section 53.059 (now repealed), and also adds several new requirements that a contractor must follow in order to perfect a lien on a residential construction project.
In order to have a valid lien against a homestead, the contract must be in writing and signed by both the owner and the contractor before any work commences or material is furnished, and the contract must be recorded with the county clerk of the county in which the homestead is located. Texas Property Code §53.254. If the owner of the homestead is married, the contract must be signed by both spouses. Id. Additionally, the contract must contain a disclosure statement "substantially similar" to that which is provided in Texas Property Code §53.255(b), which is a two-page, detailed statement of a homeowner's rights, liabilities, and obligations regarding residential construction. The suggested disclosure statement also includes a list of suggestions for the homeowner to follow during the residential construction process. The disclosure statement is substantial, and you are advised to duplicate the required language verbatim. Note, however, that Section 53.255(c) states that failure of a contractor to comply with Section 53.255(b) does not invalidate a lien under Chapter 53 of the Property Code, a contract lien, or a deed of trust. It is not yet clear under Texas law, then, what effect there would be, if any, if the contractor failed to include the disclosure statement in its contract with a homeowner.
Additionally, pursuant to Texas Property Code §41.007(a), a contract with the homeowner must also contain the following warning, conspicuously printed, stamped, or typed in a size equal to at least 10-point bold type, next to the owner's signature line on the contract:
IMPORTANT NOTICE: You and your contractor are responsible for meeting the terms and conditions of this contract. If you sign this contract and you fail to meet the terms and conditions of this contract, you may lose your legal ownership rights in your home. KNOW YOUR RIGHTS AND DUTIES UNDER THE LAW.
A contractor's failure to include this notice constitutes a false, misleading, or deceptive act or practice under Section 17.46 of the DTPA. Texas Property Code §41.007(b).
A contractor must also attach to the disclosure statement required by Section 53.255, or furnish to the owner before the commencement of construction, a written list that identifies by name, address, and telephone number each subcontractor and supplier the contractor intends to use and the work to be performed. Texas Property Code §53.256. The contractor is also required to provide the owner with an updated list of subcontractors and suppliers not later than the fifteenth (15) day after the date on which a subcontractor or supplier is added or deleted. Id. The subcontractor/disclosure list must also have the following notice:
NOTICE: THIS LIST OF SUBCONTRACTORS AND SUPPLIERS MAY NOT BE A FINAL LISTING. THE CONTRACTOR IS REQUIRED BY LAW TO SUPPLY UPDATED INFORMATION, AS THE INFORMATION BECOMES AVAILABLE, FOR EACH SUBCONTRACTOR OR SUPPLIER USED IN THE WORK PERFORMED ON YOUR RESIDENCE.
Texas Property Code §53.256(b). As with the disclosure statement required by Section 53.255(b), the failure of a contractor to provide the subcontractor/supplier disclosure list in Section 53.256(b) does not invalidate a lien under Chapter 53 of the Texas Property Code, a contract lien, or a deed of trust. Texas Property Code §53.256(c).
Furthermore, under a residential construction contract, the original contractor must provide to the owner a signed periodic statement which lists the bills or expenses that the original contractor represents will be paid or that have been paid for which the original contractor is requesting payment. Texas Property Code §53.258(a). The contractor is not required to include in the statement the bills or expenses for which the contractor has obtained a valid lien release or waiver from the subcontractor or supplier to whom the bills or expenses are owed if the statement includes a written representation that the balance of any funds that are not itemized in this statement will be paid to either (1)the subcontractor or supplier who provided the lien release or waiver; or (2)the original contractor as reimbursement for expenses incurred, profit, or overhead. Id.
If the project is being financed by a third party that advances loan proceeds directly to the original contractor, the lender is required to obtain from the contractor the signed periodic statement required by Section 53.258(a) that covers the funds for which the contractor is requesting payment, and the lender must also provide to the owner a statement of funds disbursed by the lender since the last statement was provided to the owner. Texas Property Code §53.258(b). The lender is required to provide to the owner the lender's disbursement statement and the disbursement statement the lender obtained from the contractor before the lender disburses the funds to the original contractor. Texas Property Code §53.258(c). The failure of a lender to comply with this section does not invalidate a lien under Chapter 53 of the Texas Property Code, a contract lien, or a deed of trust. Texas Property Code §53.258(e). However, it is a misdemeanor for a person to intentionally, knowingly, or recklessly provide false or misleading information on a disbursement statement required under Section 53.258 of the Texas Property Code. The punishment for such an offense is a fine not to exceed $4,000.00 or jail time not to exceed one year, or both a fine and confinement. Additionally, a person may not receive community supervision for the offense. Texas Property Code §53.258(f).
As a condition of final payment under a residential construction contract, the original contractor, at the time final payment is tendered, must execute and deliver to the owner an affidavit stating that the contractor has paid each person in full for all labor and materials used in the construction of improvements on the real property. If the contractor has not paid each person in full, the contractor must state in the affidavit the amount owed and the name and, if known, the address and telephone number of each person to whom a payment is owed. Texas Property Code §53.259(a).
A seller of real property on which a structure of not more than four units is built and that is intended as the principal place of residence for the purchaser shall, at the closing of the purchase of the real property, execute and deliver to the purchaser an affidavit stating that the seller has paid each person in full for all labor and materials used in the construction of improvements on the real property and that the seller is not indebted to any person by reason of any construction. Texas Property Code §53.259(b). If the seller has not paid each person in full, the seller must state in the affidavit the amount owed and the name, if known, and the address and telephone number of each person to whom payment is owed. Id. If a person intentionally, knowingly, or recklessly makes a false or misleading statement in the contractor or seller's affidavits in Section 53.259 of the Texas Property Code, that person is guilty of a misdemeanor, with a punishment of a fine not to exceed $4,000.00 or jail time not to exceed one year, or both a fine and confinement, with no opportunity to receive community supervision for this offense. Texas Property Code §53.259(c). Furthermore, a person signing an affidavit under Section 53.259 is personally liable for any loss or damage resulting from any false or incorrect information in the affidavit. Texas Property Code §53.259(d).
Finally, a contractor may not require an owner of real property to convey the real property to the contractor, or an entity controlled by the contractor, as a condition to the performance of the residential construction contract. Texas Property Code §53.260.
A lien affidavit relating to a homestead must meet the requirements of Section 53.254(f) of the Property Code. The affidavit must contain a notice "conspicuously printed, stamped, or typed in a size equal to at least 10-point boldface or computer equivalent, at the top of the page," as follows:
Texas Property Code §53.254(f). The affidavit must be filed by a person claiming a lien on a residential construction project not later than the fifteenth (15) day of the third (3d) calendar month after the day on which the indebtedness "accrues." Texas Property Code §53.052(b). The definition of "accrual of indebtedness" is discussed in Section F of this paper.
The Property Code also requires that, for a lien on a homestead to be valid, the notice required under other sections to be given to the owner must include a statement which advises the owner of his or her obligations to withhold ten percent (10%) of the contract price or value of the work for thirty (30) days after completion of the construction, and that if the owner withholds the retainage and an amount sufficient to cover any written notice of claim and has paid that amount, if any, to the claimant, any lien claim filed against the homestead by a subcontractor or supplier who does not contract directly with the owner will not be a valid lien. Texas Property Code §53.254(g). This notice provision is expressly set out in Section 53.254(g) of the Property Code, and you are advised to duplicate the required language exactly.
E. Property Subject to Lien.
Generally speaking, a mechanic's lien attaches to whatever was enhanced by the value of the labor or material covered by the lien. The property to which a mechanic's lien extends includes the house or building, fixtures and other improvements, and whatever land or lot of land is necessarily connected with the covered work or activity, except for abutting sidewalks, streets, and utilities that are public property. See Texas Property Code §53.022.
The term "lot" is not statutorily defined, but the Texas Supreme Court considers the most reasonable meaning of the term to be a single tract of land as recorded in the deed records of the county in which the property is situated. Under certain circumstances, however, the lien may be held to attach to contiguous lots, provided the owner has elected to treat them as a unit. This would be true for both residential and commercial projects in a city, town, or village, but in rural settings the lien may extend to up to fifty (50) acres, provided, of course, that the improvement covered by the lien is found upon the acreage. Texas Property Code §53.022(d).
Once it is perfected, a mechanic's lien extends to the improvements affected by the covered work, the land upon which the improvements are situated, and to the fixtures, tools, and machinery actually incorporated into the improvement. Remember, however, that specially fabricated material is covered, even if it never reaches the work site or is used. Texas Property Code §53.021(b).
Also, a general or prime contractor's lien extends to the entire job or improvement, including those components which have been supplied by subcontractors. Under ordinary circumstances, a lien will only attach to the interest of the person who contracted for the work, meaning that, in the case of a tenant, the lien will attach only to the tenant's leasehold interest. An owner, however, either himself or through an agent, may create a situation in which the lien will extend even to the owner's interest, as well as to the tenant's leasehold.
F. Effect of Recording Lien.
A mechanic's lien will not be enforced if it is not properly perfected by a process of written notices to those entitled to notice and by public recording of a properly completed and executed affidavit. The single most important tool necessary to ensure proper compliance with the elaborate notice requirement imposed by Texas law is one of the oldest devices available: a calendar.
Notices must be given by the prime contractor to the owner, and by derivative claimants to both the contractor and the owner, pursuant to the Texas Property Code. Notices must also be given to the proper persons, and the affidavits must be recorded within the time required by the statute, in order to "perfect" the lien. Although the lien perfection process is covered in another portion of this seminar, it is worthwhile to set out the basic requirements at this point.
For non-residential construction projects, both original contractors and subcontractors must file their lien affidavits within the same period of time, which is by the fifteenth (15th) day of the fourth (4th) calendar month following the day the claimant's indebtedness "accrues." Texas Property Code §53.052(a). Lien affidavits must be filed by the fifteenth (15th) day of the third (3d) calendar month following the day the claimant's indebtedness "accrues" for residential construction projects. Texas Property Code §53.052(b). The claimant's debt accrues at different times, however, depending upon whether the claimant is an original contractor or a subcontractor. The debt to an original contractor accrues, by statute, either "on the last day of the month in which a written declaration by the original contractor or the owner is received by the other party stating that the contract has been terminated," or "on the last day of the month in which the original contract has been completed, finally settled, or abandoned." Texas Property Code §53.053(b). Indebtedness to a subcontractor accrues on the last day of the last month in which the labor was performed or the material furnished. Texas Property Code §53.053(c).
Indebtedness for specially fabricated material accrues on the last day of the month (a.) in which materials were delivered; (b.) in which delivery of the last of such material would normally have been required at the job site; or (c.) in which any material breach or termination of the original contract by the owner or contractor or of the subcontract under which the material was furnished occurred. Texas Property Code §53.053(d). A claim for retainage accrues on the last day of the month in which all work called for by the contract between the owner and contractor has been completed, finally settled, or abandoned. Texas Property Code §53.053(e).
Any party filing an affidavit must send a copy by registered or certified mail to the owner, at the owner's last known business or residence address, not later than one business day after the date the affidavit is filed with the county clerk. Texas Property Code §53.055(a). If the person is not an original contractor, the person filing the affidavit must also send a copy to the original contractor, again at its last known business or residence address, within the same time period. Texas Property Code §53.055(b).
In addition to the filing and service of the affidavit under the statutes cited above, a derivative claimant (a contractor or supplier on a tier below the original contractor) must also send timely notice of its unpaid claim to the owner and, if the claimant did not contract directly with a prime contractor, but with another subcontractor, to the contractor, as well. These notices must be given by the derivative claimant to its prime contractor not later than the fifteenth (15th) day of the second (2d) month following each month in which all or part of the claimant's labor was performed or its material delivered, and to the owner not later than the fifteenth (15th) day of the third (3d) month following each month in which all or part of the labor was performed or material delivered. Texas Property Code §53.056.
Once the owner has received notice of a derivative claim, the owner may withhold from the contractor any amounts necessary to pay the covered claim. Texas Property Code §53.081. In other words, provided proper statutory compliance has been achieved, the effect is to trap funds in the hands of the owner and transfer to the derivative claimant the owner's obligation to pay the prime contractor, to the extent necessary to satisfy the claim. To authorize the owner to withhold funds (i.e. to "trap" them), the notice to the owner must be sent to the owner by registered or certified mail, and it must state that, if the claim remains unpaid, the owner may be personally liable and the owner's property subject to a lien unless the owner withholds payments from the contractor for payment of the claim or the claim is otherwise paid or settled. Texas Property Code §53.056. The owner is then required to withhold the funds until the time for recording the affidavit has passed or, if it is recorded, until the claim has been either satisfied or released. Texas Property Code §53.082. As the required notice states, the owner may become personally liable for the claim if he pays the contractor after receiving notice of a derivative claim.(2)
Regardless of whether funds are successfully trapped, the owner is required by statute to withhold and retain ten percent (10%) of the original contract price or value of the work during the course of the contract and for an additional thirty (30) days after completion. Texas Property Code §53.101(a). A claimant who sends the notices required by the statute and files an affidavit claiming a lien not later than the thirtieth (30th) day after the work is completed has a lien on the retained funds. Texas Property Code §53.103.
G. Priority of Lien.
Texas Property Code Sections 53.121 through 53.124. govern the hierarchy, or priorities, of competing liens. Generally speaking, once it is properly perfected, a mechanic's lien "relates back" to the date of the inception of the lien. The inception date of a lien is generally the date of commencement of construction of the improvements or the date materials were delivered to the site. Usually, construction is considered to have commenced when the construction or material is actually visibly apparent on the land, so long as the activity is a defined improvement under the statute. Texas Property Code §53.124. Excavation for or the actual laying of a foundation are included.
A properly perfected mechanic's lien attaches to the covered property in preference to other prior liens, encumbrances, or mortgages, although it does not affect any lien, encumbrance, or mortgage which was on the land at the time of the inception of the mechanic's lien, except as to "removables." Texas Property Code §53.123. All properly perfected mechanic's liens are on equal footing with one another without reference to the date each respective lien affidavit was filed. Texas Property Code §53.122. An exception to this rule is the lien of an architect, engineer, or surveyor, which is determined by the date of recording. Texas Property Code §§53.122(a) and 53.124(e).
Section 53.123 of the Texas Property Code also provides to a valid mechanic's lien holder a priority over all deed of trust liens as to covered improvements which are considered to be "removables." In order to be considered a "removable," an improvement must be capable of being removed from the construction without material injury to the land, other preexisting improvements, or the improvement being removed.
The following sections and presentations will cover the perfection and enforcement of liens and lien rights in greater detail.
1. The author wishes to thank Jason B. Speights, an associate attorney with Greenberg, Peden, Siegmyer & Oshman, P.C., for his efforts in revising and updating this paper to include the newest provisions of the Texas Property Code.
2. Although Sections 53.081-53.084 have not been held to create liability for contractors as well, a contractor who fails to withhold payment from its subcontractor after receiving a "fund trapping" letter from a supplier to the subcontractor can be liable under Chapter 162 of the Texas Property Code (commonly known as the "Construction Trust Fund Act"). The funds in the contractor's possession after receiving a "fund trapping" letter from its subcontractor's supplier are considered to be "Trust Funds" for the benefit of the supplier. Don Hill Construction Co. v. Dealers Electrical Supply Co., 790 S.W.2d 805, 811-12 (Tex.App.--Beaumont 1990, no writ); Stone Fort National Bank v. Elliot Electric Supply Co., Inc., 548 S.W.2d 441 (Tex.Civ.App.--Tyler 1977, writ ref'd n.r.e.).